99% of Long-Term Investing Is Doing Nothing; the Other 1% Will Change Your Life

Napoleon's definition of a military genius was, "The man who can do the average thing when all those around him are going crazy." It's the same in investing.

Building wealth over a lifetime doesn't require a lifetime of superior skill. It requires pretty mediocre skills -- basic arithmetic and a grasp of investing fundamentals -- practiced consistently throughout your entire lifetime, especially during times of mania and panic. 

Most financial advice is about today -- what should I do now, what stocks look good now. But the vast majority of the time, I've come to realize, today isn't that important. It's just buying and waiting. Most of what matters as a long-term investor is how you behave during the 1% of the time everyone else is losing their cool.

To demonstrate my meaning, I used Yale economist Robert Shiller's market data going back to 1900 and created three hypothetical investors. Each has saved $1 a month, every month, since 1900.

The first is Betty. She doesn't know anything about investing, so she dollar-cost averages, investing $1 in the S&P 500 every month, rain or shine.

Sue, a CNBC addict, invests $1 a month into the S&P, but tries to protect her wealth by saving cash when the economy is in recession, deploying her built-up hoard back into the market only after the economy officially exits a recession.

Bill, a mutual fund manager whose only incentive is to look right in the short run, invests $1 a month, but stops investing in stocks six months after a recession begins, and only puts his money back into the market six months after a recession ends.

After 113 years of investing, who's won? Boring Betty takes it by a mile:

What fascinates me about these numbers is that of the 1,353 months since 1900, only 321 of them have been altered for Sue and Bill, because that's the number of months the economy has been in recession. If you dig further into the numbers, you'll see that a much smaller percentage of months make up the bulk of the difference in returns. Ten percent of months explains two-thirds of the difference between dollar-cost averaging and sitting out during recessions. Five percent explains more than half. According to analyst Eddy Elfenbein, over the last 20 years, the 24 best days accounted for the entire gain in the S&P 500. "The other 99.5% of the time has been a net loss."

Every one of the market's top days took place during periods of sheer terror. Of the 20 best market days of all time, 17 were during the Great Depression, one was a few days after the crash of 1987, and two were during the depths of the 2008 financial crisis. Missing these days devastated your long-term returns. And most investors who missed them were those who sold out, or stopped buying, after stocks crashed and everyone around them were busy panicking. Those who try to avoid losses consistently end up missing even larger gains. That's why Boring Betty, who is average all of the time, ends up above average overall.

A pilot once described his job as "hours and hours of boredom punctuated by moments of sheer terror." I think of investing the same way. Your success as an investor will be determined by how you respond to punctuated moments of terror, not the years and years spent on cruise control.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics. 

No Pitch

 


Read/Post Comments (27) | Recommend This Article (148)

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  • Report this Comment On December 20, 2013, at 2:55 PM, SkepikI wrote:

    Morgan: A very useful article from the theoretical point of view. And the point it makes in theory is very valuable indeed. So much so that IMHO it might actually convince certain investors that need more discipline to succeed to have that discipline. And yes, I could have used it 40 years ago when my discipline was sagging and I would be far ahead of where I am today. Fortunately, having learned this truth the HARD way with much pain, I mended my ways about 22 years ago and so I am ok today.

    So I take nothing away from your point and your article when I bemusedly note that Betty is long dead and her heirs are the beneficiary of her discipline. On the other hand, one could charitably posit that Betty is the oldest living American today or will be soon and now can enjoy the fruits of her intelligence by purchasing a lavish wake in advance ;-)

    And I will note for the record: Timing is bad except when you realize you likely have more money than time, and time the market to enjoy that fact while you can. May you and every Fool that reads your article have the good sense to do just that!

  • Report this Comment On December 20, 2013, at 3:31 PM, duuude1 wrote:

    Halleluja and amen duuude! Every paycheck, rain or shine, throw it in the S&P and never touch it. The most basic, the most practical, and the most guaranteed way to retire safely.

    Just curious if those returns are with dividends re-invested?

    And where would gold be in that same time period?

    And how about real estate?

    And how about bonds?

    Why stocks? I think if you plotted those, it would be crystal clear why diversified stocks beat all other assets classes, and dollar-cost averaging both beats other strategies and effectively smooths out the volatility.

    Duuude1

  • Report this Comment On December 20, 2013, at 5:48 PM, hbofbyu wrote:

    I thought Napoleon's definition of military genius was to have Numchuck skills... bowhunting skills... computer hacking skills.

  • Report this Comment On December 20, 2013, at 5:53 PM, duuude1 wrote:

    That's Numchuck Norris...

  • Report this Comment On December 20, 2013, at 8:46 PM, RouteReflector wrote:

    I've grown tired of all this Chuck Norris nonsense. He is not some all-powerful being; he is an actor. If Chuck Norris were such an all-powerful, godlike creature, he'd materialize over here right now and slam my head into the keyboard simply for writing thissddhfhfhfnfnfhfjfjjjfdewowkfndjfnesmcsncbeqodhhffhk

  • Report this Comment On December 21, 2013, at 10:09 AM, taloft wrote:

    ^ Okay, I admit that made me laugh. I think Morgan has a very good point here. Keeping your head when everyone else is losing theirs is the way to survive a great many things.

    I think attitude is the key. There are those who think to themselves, "The market is tanking. I've got to sell now." Then there are those that think, "The market is dropping. Now is a great time to buy more shares."

    I'm in the last group and it has worked well for me.

  • Report this Comment On December 21, 2013, at 1:12 PM, DogfaceItem7 wrote:

    TO KEEP YOUR HEAD ABOUT YOU WHEN ALL OTHERS ARE LOSING THEIRS... was Kipling.

    That might have been problematic should one be in line for their moment upon the guillitine.

    Is this market the start of a dash, the end of a Marathon, or is a hungry grizzley after the hindmost?

    Or maybe the speedster at the front doesn't yet see the cliff just around the bend, and will lead like Wiley Coyote our plunge to the rocks below?

    Well, ol' Wiley never quits...or learns-

  • Report this Comment On December 21, 2013, at 7:11 PM, johnnywitt wrote:

    Stay invested. When the market crashes buy more.

    If you just have to try and time the Market, then when the Shiller P/E is high: accrue cash and don't sell.

  • Report this Comment On December 21, 2013, at 7:41 PM, AnsgarJohn wrote:

    Read The Superinvestors of Graham and Doddsville.

  • Report this Comment On December 21, 2013, at 8:23 PM, whatsyourgame wrote:

    That is wonderful. I am 80 years old. If I thought that I would make it another 113 years, I might try boring Betty's approach.

  • Report this Comment On December 21, 2013, at 10:23 PM, sunrizesurfer wrote:

    I will be sharing this with my kids. I hope they invest well, and at a younger age than I did.

  • Report this Comment On December 21, 2013, at 11:17 PM, bornboring wrote:

    During hard times it would be difficult to come up with an extra dollar for investment; and it would be months after the recession when the extra dollar becomes available.

  • Report this Comment On December 22, 2013, at 7:21 AM, babbovicenza wrote:

    Good article, but...

    if I'm not mistaken (and feel free to correct me if I'm really wrongheaded) what we're trying to do, I mean, what the Foolish thing to do, is to LEARN something useful while you're performing much as Betty does in order to beat (even) Betty's gains (and 'Betty' can't possibly be any particular one of us as much as she can't be just anyone of us because we all have very different time-lines and investing possibilities).

    Sure, Betty's strategy is GREAT for some significant portion of one's portfolio. But with the balance of your investing -- guided by one or more of the several interesting strategies we can find daily discussed at MF or elsewhere -- a regular guy or gal who dedicates a bit of time and energy each 'day' to LEARN about the companies in the market WOULD be able to make significant gains where each of Betty, Sue and Bill inevitably fail, because their formulas are the stuff of caricature investors and don't tell the kind of story with the character development hoped for with Foolish investors...like I am trying to be.

    So, Betty's right for x% where x does not = 100% of MY Foolish investing dollars. Or else what the heck am I doing here?

  • Report this Comment On December 22, 2013, at 12:18 PM, zunka72 wrote:

    When you look at a return on investment which you made over a period of time (e.g. 15 years) it is always at a point it time. For example, if you invested $100 per month starting January 1, 2000. The return on your investment on March 31, 2009 (at the depth of the financial crisis) would be seriously negative. However if you continued with your investing strategy, the return on your investment on March 31, 2013 would significantly better.

    The key point these types of articles miss is when an individual needs to access the money.

    If you needed the money on April 1, 2009 your strategy was a disaster. But if you needed the money on April 1, 2013 you are a great investor.

    Dollar cost averaging combined with rebalancing based on your time horizon is very crucial and not blindly investing in S&P 500 index.

  • Report this Comment On December 23, 2013, at 6:20 PM, thecinimod wrote:

    What that beautiful and simple chart says is that those who sell during recessions and buy again afterwards underperform. The flip side of that statement is that if you bought (more) during recessions and sold afterwards, you would outperform.

    So how do we free up extra cash just when the market is going south? There are two options, depending on your risk appetite: 1) maintain a cash reserve most of the time, waiting for recessions to deploy 2) buy on margin during recessions, and cash out after.

    Personally, I am loathe to leave profits on the table by having money on the sidelines regularly, so #1 is out. However, I have a substantial tolerance for calculated risk, so #2 appeals to me. This way, I have my cash deployed at all times, and I can get some extra punch at the best moments (and I'm earning the highest expected return while the juice is running on my margin loans, giving me the best shot at coming out ahead on them).

  • Report this Comment On December 24, 2013, at 9:00 AM, PsychoDr wrote:

    The comment about when you need the money is an interesting point, except the Foolish investor would never need ALL the money at one time. At least that is how my long term strategy is designed. By being consistent and diligent in your investing over a lifetime, you minimize the impact of down years on your overall nest egg. Sure, I may have to take out some money in retirement during a rough patch in the market, but I should never need all of it at one time. So my relatively small withdrawal on March 1, 2009 does not substantially impact my principle, which is allowed to remain in the market to reap the growth benefits that will occur through March 1, 2013.

  • Report this Comment On December 24, 2013, at 9:20 AM, mainelegal wrote:

    All my best buys were made during recessions.

    Adventures like some of the HG picks and especially almost all of the "Pay Dirt" program have included some serious non performers and a few bankruptcies in my holdings, especially when the economy turns.

    I used to use margin, to my rather large ultimate disadvantage. I find that avoiding leverage and substituting long dated deep in the money calls can provide good leverage, and are low risk for quality companies when the economy is coming out of a recession.

    Morgan is always a font of useful information. After today, I don't think I will soon forget that recessions account for 25% of the time.

  • Report this Comment On December 24, 2013, at 9:24 AM, Mathman6577 wrote:

    A rule of thumb that I have seen posted numerous times on TMF is to not invest money that you will need over the next 5-8 years.

  • Report this Comment On December 24, 2013, at 9:26 AM, dsalhany73 wrote:

    Morgan,

    I am curious what would be the return of the anti-Sue, meaning someone who actually buys the S&P500 when a recession begins and stops buying when it it ends.

  • Report this Comment On December 24, 2013, at 3:16 PM, ffbj wrote:

    Well they all lost as after 113 years they are all undoubtedly dead, at least theoretically.

    It does point out though that dca is not dead, though often decried.

  • Report this Comment On December 24, 2013, at 6:26 PM, sliderw wrote:

    Are the dollar-a-month investments in nominal or inflation-adjusted dollars? If not, then the final returns are biased by investments made in the earlier years.

  • Report this Comment On December 26, 2013, at 2:55 PM, Stockllama10 wrote:

    Wow. The all-time gain of the S&P in 20 years is found in 30 days?

    Thanks, Morgan!

    (If Betty was in Tuck Everlasting...)

  • Report this Comment On December 28, 2013, at 2:11 PM, drborst wrote:

    Morgan, i get it. buy and hold and get rich, and hope I get rich enough to live off dividends so I never sell. But I probably have to sell sometime (like when my kids go to college, or when I retire).

    When were the 20 worst days? You've written before that I should expect a 50% decline sometime before I retire. If it happens when I'm 50, I can stick with stocks, but if it happens during my retirement party, then I'm brushing off resume writing skills in my 60's.

    Even Betty retires, right?

    DRB

  • Report this Comment On December 29, 2013, at 12:35 PM, sophistabubba wrote:

    Here's another perspective on the issue:

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1908469

  • Report this Comment On December 31, 2013, at 9:51 AM, lqs101 wrote:

    i appreciate the premise of this article but it all hinges on the accuracy of the calculations that were presented in the chart. however, there is no explanation of how you calculated these investment returns over 113 years. without an explanation of how you arrived at these numbers, doubt remains in my mind as to how accurate the conclusions are.

  • Report this Comment On January 15, 2014, at 3:32 PM, KombatKarl wrote:

    What were they investing in early on. I did think the S&P existed until the 20s.

  • Report this Comment On February 27, 2014, at 6:08 PM, damien05keller wrote:

    Most comments on this article are largely bias due to personal preference and risk tolerance, which is fine; however, what isn't mentioned is as simple as DIVERSICATION.

    Unless you've got a crystal ball that works you'll need to diversify your investments based on personal risk tolerance and assessing what's most intelligent for you... Or what is "least stupid" in some cases.

    Savings- not sh*t; no real interest gained; inflation is your enemy even more than before

    Stocks- I'm not going to pretend to be an expert or award-winning stock investor, but I know that the risk associated in this medium are VERY HIGH. Again, which is fine if you're alright with risky.

    401k- this is the safest and most reliable way to invest in yourself. Lower taxible income. Likely have a matched contribution of some sort by your employer. Maximize your tax savings while securing growth that is tax-deferred and therefore compounding $ on top of $.

    DIVERSIFY your investments, but invest in yourself first. Also consider that your fiduciary interests in creating wealth may very well have a higher potential for success in the hands of one who has the help and resources necessary to ensure your money is properly invested for growth considering all factors, INCLUDING your retirement or otherwise savings goals.

    Damien Keller. <-- Gee, I should LinkedIn that guy!

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